Montenegro

Sead Salkovic
Eurofast Global
Montenegro

Sead Salkovic of Eurofast Global explains the Montenegrin competitive tax policy, which is expressed, for example, through a growing treaty network and a developing series of incentives

Montenegro has significantly advanced its tax system, especially regarding administrative implementation of the tax legislation. The new model of economic growth is based on productivity increase, innovations and competitiveness. Montenegro possesses a lot of potential for additional foreign direct investments.

The most favourable advantages available to investors are:

The lowest corporate and personal income tax rates of 9%;
VAT tax rate of 17%;
Economic stability and usage of the Euro as currency;
Political stability aiming at NATO and EU integrations;
Full protection and undisturbed usage of property rights;
Simple procedure of company formation.

Recent tax developments

The government recently adopted tax measures at the state level to remove the remaining barriers and to encourage investors to build hotels of high category (four or more stars). Measures include a decrease in real estate tax for such hotels, and simultaneously an increase to the tax burden for the low category hotels (one, two, and three stars).

Thus, the low category hotels located in the primary sites for tourism development have to pay significantly higher real estate tax than they pay now. If the same facilities upgrade their category to the level of four stars or higher, the real estate tax they have to pay will be slightly lower. Under the new real-estate legislative solution, the owner of the tourism objects (for example, hotels and resorts, wild resorts, motels, lodging houses and hostels) shall pay a real estate tax of between 4% and 4.5% of the real estate market value, if the facilities retain a one star category standard. Upgrading the same facilities to a category of at least four stars, means the owner will pay tax defined by the local authority ranging from 0.1% and 1% of the immovable property market value.

The government gives great importance to the usage of the international well known luxury brands in the tourism industry simply because they represent sustainable demands on the global tourist market with a high yield. So, in the longer term it is creating greater tax revenues to the country's budget.

Procedure for deferred payment of corporate income tax liabilities

Valid tax relief with respect to corporate income tax (CIT) has introduced a deferred payment for the legal entities in Montenegro.

In compliance with this, a regulation issued by the government provides that "the Ministry of Finance may defer payments of tax and non-tax claims that belong to the state budget and approve the payments to be done in instalments and to capitalise tax and non-tax claims for the purposes of regional developments, reconstructing of legal entities and for other purposes".

Montenegro's CIT Law stipulates that legal entities should submit a tax return to the competent tax authority for the period which the tax is calculated, latest within three months from the expiry of the tax period (the tax year) for which the tax is calculated. Concurrently, during the same period, tax reported in tax return has to be paid.

Pursuant to specific provisions of Decree of CIT deferred payment, accrued tax liability of legal entities in Montenegro for the previous tax year can be paid in six equal monthly instalments. However, in the case where this tax debt is not paid within the mentioned period, the remaining portion of the tax debt arising from the CIT is due for immediate payment.

The request for the deferred payment of legal entities' CIT is submitted to the tax authority office, according to the companies' seat, within the term of the annual tax return submission.

VAT specifics relating construction services

In the past five years, a huge interest has been shown by foreign companies in the Montenegrin Construction industry. Along with other considerations, one of the main issues for foreign investors to consider is the VAT compliance.

In that respect, the VAT Law specifies that a company without a headquarters, business unit, or permanent or usual residence in Montenegro must nominate a local tax representative before tax administration. In counterpart, if a tax representative is not appointed, the VAT has to be paid by the recipient of the services, in that domestic companies, as a recipient of services, are required to calculate and pay VAT at the time of issuing the invoice.

Sale of newly constructed facilities and the transfer of rights on immovable property is deemed as a supply of products. In line with this, the first transfer of rights to dispose a newly constructed building, including housing, can be performed exclusively by the investor who will pay VAT at the rate of 17%. In tax practise, VAT accumulated during the construction works will create a certain VAT credit that can be reimbursable by the tax administration or, the investor can be compensated upon a sale of newly constructed facilities.

On the other hand, selling a flat by the constructor to a third party is considered as a second transfer and VAT-free, but taxable at the rate of 3% based on the law of tax-on-turnover of immovable property. Tax obligation occurs at the moment of sale contract closure.

Non-resident construction companies under corporate taxation

A building site, construction or installation project constitutes a permanent establishment in Montenegro only if it lasts more than six months, unless there is double-tax treaty in place that provides otherwise. According to the CIT Law, subject of taxation of non-resident business units would be the profit that the business units realised in Montenegro.

Unified tax registration in Montenegro

The exciting tax principle, named One Application, One Counter, has abolished past tax practice, which included submissions of sixteen different application forms in several institutions. The new project involved the formation of a central register of tax payers, a single place of payment and a single tax application, which as expected, should solve the problems of discrepancies in operation and information between Montenegrin institutions. Moreover, in order to facilitate both tax registration and incorporation of the legal entities, the new project includes the Montenegrin tax authority and the Register of Commercial Court to be situated at the same place.

Tax implication on acquisition of immovable property in Montenegro

Ownership of immovable property in Montenegro

Montenegro treats foreign, legal and physical persons in the same manner as the domestic business subjects without any reciprocity terms. However, the law does provide specific restrictions for foreign investors' acquisitions of immovable properties that belong to cultural heritage and public interests.

Property transfer tax

Montenegro still remains a favourable market for real-estate investments. The prices of real-estate are still high compared to other neighbour countries, but very soon, according to predictions, they are expected to go dramatically lower.

The transfer of property is taxed at the rate of 3%. The tax base for property transfer tax is the value stated in the purchase agreement. However, where the value from the purchase agreement is far from the market value or it is not presented realistically, the municipal market value calculation shall be applied.

Moreover, in cases when the real estate is included in the company's capital as a contribution in kind, the property transfer tax shall not be paid.

The taxpayer is the buyer – the acquirer of the real estate. The transfer of the property must be reported to the tax administration by submitting the tax return within 15 days from the date of signing the purchase agreement.

Annual property tax

According to the amended Montenegro tax regulation, the property tax rate is proportional. The owner of the property (including foreign person or company) is liable to pay this tax, which is set by municipal tax authorities. The new property tax rates range from 0.1% to 1% of immovable property market value.

Capital gains taxation

According to Montenegro's tax law, capital gains realised from the sale or other assignment of land, building facilities, property rights, shares in capital and stock values are considered to be incomes that are not taxed separately but included in the taxable income of the company.

Montenegro double tax treaties

Montenegro has signed 43 tax treaties regulating the double taxation of income and capital gains, of which 37 are effective and the rest are still pending for ratification. Montenegro has signed new tax double tax treaties with UAE and Ireland.

Incentives for non-developed areas of Montenegro

Newly incorporated companies in the production sector are exempted from payment of corporate income tax during the first three years starting from the day of the commencement of business activities in relation to profit realised in an undeveloped municipality. The first year of utilisation of this tax exemption begins on the day of registration in the Central Register of the Commercial Court. A newly incorporated company is not a candidate for this tax relief if the founder, or cofounder, transfers his existing taxable business to the exempt company that performs the same activities as the existing company. A legal entity formed as a result of any status changes, or by a merger or a division of an existing legal entity, shall not be considered a newly incorporated company and consequently shall not be entitled to this tax relief.

Vibrant system

The tax legislation of Montenegro, which is largely harmonised with EU legal regulations, creates an effective tax environment for dynamic growth of the economy, which stimulates new direct investment and places Montenegro among the most competitive European tax systems.

Sead Salkovic (sead.salkovic@eurofast.eu), Eurofast Global, Podgorica Office/Montenegro